The British Parliament, following the Law Commission recommendations in 1977, enacted the Unfair Contract Terms Act, which came into force on the 1st day of February 1978. The Act is extraordinary in the sense that it marked a decade of efforts to fight the tendency of businesses to exclude liabilities in their contracts with consumers.

The Act begins with the subject matter it controls, that is business liability. Business liability is defined in section 1 of the Act as being liability that had arisen and caused by the business while acting in the course of a business (pardon the pun!). Section 2 goes on further to say that business liability for negligence which causes death or personal injury cannot be excluded with reference to a contract term or notice. Liability for negligence that causes other types of damage are subjected to a test for “reasonableness” which is discussed later below. The Act also attempts to regulate exclusion of liability for goods and services, particularly those implied by the Sale of Goods Act 1979 of the UK (our equivelent is the Sale of Goods Act 1957, which is similar to the earlier UK Sale of Goods Act 1893 more then anything). In the recent case of Langstane Housing Association Ltd. v Riverside Construction (Aberdeen) Ltd., Ramsay & Chalmers and others [2009] CSOH 52 the Scottish Court of Session had to decide whether a “net contribution clause” (ie a clause limiting liability to “such sum as the Consulting Engineer ought reasonably to pay having regard to his responsibility for the loss or damage suffered as a result of the occurrence or series of occurrences in question …” was held not to be a clause that limited liability? Why? Because it merely sought to make the said Consulting Engineer liable for his own breach only and not liable under the common law doctrine of joint and several liability. More on this here.

What of the so-called “reasonableness” test? Well, the test is set out in section 11 of the Act, and subsection (1) in particular requires regard to be had as to whether the term is a reasonable one in light of the circumstances it was negotiated. Avaliability of other means of claiming remedy, such as insurance, as was considered in the case of Smith v Eric S Bush [1990] 1 AC 831, would influence the courts in their assesment for reasonableness as well. Section 11(2) makes reference to Schedule 2 of the Act which provides an illustrative list of terms that might be regarded as unreasonableness.

What the Act has done is to introduce a direct test of assessing the appropriateness of an exclusion clause in lieu of the indirect method of control imposed by the courts, mentioned in the ealier Par 1 post. What a pity such an Act does not exist in Malaysia. Another useful control on not just exclusion clauses, but unfair contract terms in general, that is not in Malaysia is the Unfair Terms in Consumer Contracts Regulations 1999 which implement European Union Directive 93/13/EC on unfair terms that exist in consumer contracts. The Regulations apply to any clause in a contract that would potentially be unfair, but unlike the Unfair Contract Terms Act 1977, apply only to consumer contracts, so is more limited in scope. Regulation 8 of the Regulations provided that an unfair term shall not be binding on the consumer and also empower the UK’s Office of Fair Trading to assess the fairness of consumer contract terms. A recent example of this could be seen in the case of Office of Fair Trading v Abbey National plc and Others [2009] EWCA 116 where bank charges for instructions by consumers for standing orders (such as making payments and the like) were held by the English High Court (and affirmed by the Court of Appeal) were subject to review for fairness, much to the chagrin of the banks involved.

Again, if only we had such legislation in Malaysia. Well, those of you done reading this, who are Malaysians and consumers, might now be inclined to push for such laws now that you are more informed of the situation? This article concludes the 2 part series on exclusion clauses and unfair contract terms.

We have all seen something like the above before, or something like it. “We are not liable for any damage arising from the use of our product, howsover caused” or “The management accepts no liability..” or “The customer hereby agrees to indemnify the company…” etc, etc. These are known in usual parlance as disclaimers, but in lawyers talk, they are known as exclusion clauses.

Exclusion clauses are found in both contracts, particularly consumer contracts, and notices. When I talk about consumer contracts, I mean contracts where one of the parties thereto is a consumer, who makes a purchase for a good or service from a business. The purpose of the former is to satisfy his need or want while the purpose of the latter is to profit from such a contract. An elementary principle is that consideration for a contract when, given, should be good consideration. In the case of the consumer and the business, the consumer pays good money for a good or service (pun not intended!) and the business should, accordingly, ensure that the good or service is up to par with the money given for it. Unfortunately, businesses have not always wanted to bear this burden, and so have sought to exclude it in the form of incoperating exclusion clauses in contracts seeking to obtain consent from the consumer to disclaim them. Consumers on their part do not wish for such liability, as and when they arise, to be disclaimed, for otherwise, they would be left without a remedy. Unfortunately they never seem to have a choice, as the exclusion of liability makes good business sense and would be adopted by almost all businesses as a result. Exclusion clauses have thus been described as “weapons of consumer opression”.

The English courts have often manifested their hostility to the operation of such clauses and Malaysia by virtue of the Civil Law Act 1956 has recieved such hostility. Such hostility had been described by the late Lord Denning as “worshipping the idol of freedom of contract yet stabbing the idol in the back” in the case of George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284. The “stabbing” as he put is was eventually developed into a set of three rules, the rules of incorperation, interpretation and fundamental breach.

In the rule of incorperation, the saying is that the clause in question must be part of the contract itself at first to be effective. The one seeking to rely on the clause must have brought it to the attention of the other party (ie the business must have brought it to the attention of the consumer). The bringing of attention to the clause must also have been concluded before, not after, the contract has been made. A classic example is the English case of Olley v Marlborough Court Ltd [1949] 1 KB 532 where a woman had left some furs in her hotel room and they were found to be stolen. The innkeeper pleaded on a clause stating to the effect that he would accept no liability for items stolen that were not handed to him for safekeeping. Such a clause was found in the hotel room. It was held that the notice came too late, for the contract had been concluded when the woman had paid consideration for her hotel room in the lobby. This rule does not apply when a consumer has already signed a contract however, as signature would have implied that he would have noted the contents therein, including that of the exclusion clause. This was held in the classic case of L’Estrange v Graucob [1934] 2 KB 394.

In the rule of intepretation, the courts have held that when a party purports to exclude liability, the party must state in terms the kind and nature of liability he wants to exclude. Such an approach was made in the case of Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71 where a car was destroyed in a garage by a fire caused by the negligence of the employees of the business. The exclusion clause pleaded did specifically mention damage by fire, but failed to mention that the damage would be one of negligence, and did not exclude the liability pleaded.

The rule of fundamental breach has not always been readily accepted, but it generally encapsulates the principle that a breach that is so fundamental it “goes to the root of the contract” cannot be excluded: Karsales (Harrow) Ltd v Wallis [1956] 1 WLR 936. Thus if a contractor of a building were to exclude liability for such a building collapsing, for example, it could be argued that such a liability would be so great it “goes to the root of the contract” to construct a building, and is thus not able to be excluded.

Most disclaimers however, easily passed the above tests put by the English courts, but could they survive the almighty power of the British Parliament? In 1977 that Parliament said “enough” and came to the aid of the consumer by enacting an Act to subject such exclusion clauses to an even more rigourous test, even providing for liability exclusions for certain types of damage to be banned outright! What is the name of this particular Act? Stay tuned for more in the next part to find out!

Reading Law archives

Interested in contributing?

If you're from Malaysia, a law student or even a budding lawyer, simply leave a comment in any of the posts and we will get back to you. Remember to include pertinent details such as your e-mail, please.